Self-selection in risky financial decision-making: An experiment on framing and ?perceived loss? aversion

Irene Comeig, Benoit Bediou, Ainhoa Jaramillo-Guti‚rrez and David Sander
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Benoit Bediou: Swiss Center for Affective Sciences, University of Geneva (Swiss),, http://www.affective-sciences.org
Ainhoa Jaramillo-Guti‚rrez: Department of Applied Economics, University of Valencia (Spain), http://centros.uv.es/web/departamentos/D110/castellano/
David Sander: Swiss Center for Affective Sciences, University of Geneva (Swiss),, http://www.affective-sciences.org
Authors registered in the RePEc Author Service: Ainhoa Jaramillo-Gutiérrez

No 2010-07, Working Papers "New Trends on Business Administration". Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". from Interuniversity Research Master and Doctorate Program (with a quality mention of ANECA) on "Business Economics", Universities of Valladolid, Burgos, Salamanca and León (Spain). Until 2008, Interuniversity Doctorate Program (with a quality mention of ANECA) “New trends in Business Administration”, Universities of Valladolid, Burgos, and Salamanca (Spain). Master en Investigación y Programa de Doctorado Interuniversitarios (con mención de calidad de la ANECA) en "Economía de la Empresa", Universidades de Valladolid, Burgos, Salamanca y León (España). Hasta 2008, Programa de Doctorado Interuniversitario (con mención de calidad de la ANECA) “Nuevas Tendencias en Dirección de Empresas”, Universidades de Valladolid, Burgos y Salamanca (España).

Abstract: A major characteristic of financial markets is information asymmetry. To combat its problems principals can use screening. That is, they can offer the clients a menu of contracts and infer their risk level from their choices. If the pattern of choices that clients with different risk level make differs, there is self-selection of clients and screening occurs. We conduct an experiment to address an important question for such settings?does the framing of the offered menu of contracts interfere with the self-selection of clients? The answer is yes. In fact, subjects? choices shift when the same (positive) outcomes of the same menu of contracts are presented in two different frames. Since both frames differ in the ?perceived? reference-point, we propose a theoretical approach that initially follows Prospect Theory to explain our results. Subjects exhibit loss aversion in their perception and assessment of the positive outcomes below the reference-point, and self-selection fails to occur.

Keywords: Behavioral finance; Framing; Loss aversion; Reference point; Self-selection; Screening (search for similar items in EconPapers)
JEL-codes: C91 D03 D82 G32 (search for similar items in EconPapers)
Pages: 15 pages
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